UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2006
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_ OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________
Commission file number 0-565
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ALEXANDER & BALDWIN, INC.
-------------------------
(Exact name of registrant as specified in its charter)
Hawaii 99-0032630
------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P. O. Box 3440, Honolulu, Hawaii 9680l
822 Bishop Street, Honolulu, Hawaii 96813
----------------------------------- -----
(Address of principal executive offices) (Zip Code)
(808) 525-6611
--------------
(Registrant's telephone number, including area code)
N/A
---
(Former name, former address, and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
(Check one): Large accelerated filer [X] Accelerated filer [ ]
Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Number of shares of common stock outstanding as of
June 30, 2006: 43,067,453
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
-----------------------------
The unaudited, condensed financial statements and notes for the second quarter
and first six months of 2006 are presented below, with comparative figures from
the 2005 financial statements.
ALEXANDER & BALDWIN, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(In millions, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
2006 2005 2006 2005
---- ---- ---- ----
Revenue:
Operating revenue $ 418.2 $ 391.2 $ 779.5 $ 755.0
---------- ---------- ----------- -----------
Costs and Expenses:
Costs of goods sold, services and rentals 347.7 308.1 641.4 585.5
Loss on investment -- 2.2 -- 2.2
Selling, general and administrative 36.3 33.4 72.1 65.5
---------- ---------- ----------- -----------
Operating costs and expenses 384.0 343.7 713.5 653.2
---------- ---------- ----------- -----------
Operating Income 34.2 47.5 66.0 101.8
Other Income and (Expense):
Equity in (loss) income of real estate
affiliates (1.7) 0.8 12.2 1.8
Interest income 2.7 1.2 4.9 2.1
Interest expense (3.0) (3.0) (6.2) (5.8)
---------- ---------- ----------- -----------
Income Before Taxes 32.2 46.5 76.9 99.9
Income taxes 11.7 17.7 28.7 38.0
---------- ---------- ----------- -----------
Income From Continuing Operations 20.5 28.8 48.2 61.9
Discontinued Operations (net of income taxes) 9.7 0.6 19.4 5.2
---------- ---------- ----------- -----------
Net Income $ 30.2 $ 29.4 $ 67.6 $ 67.1
========== ========== =========== ===========
Basic Earnings Per Share:
Continuing operations $ 0.47 $ 0.66 $ 1.10 $ 1.42
Discontinued operations 0.22 0.01 0.44 0.12
---------- ---------- ----------- -----------
Net income $ 0.69 $ 0.67 $ 1.54 $ 1.54
========== ========== =========== ===========
Diluted Earnings Per Share:
Continuing operations $ 0.46 $ 0.65 $ 1.09 $ 1.40
Discontinued operations 0.22 0.01 0.44 0.12
---------- ---------- ----------- -----------
Net income $ 0.68 $ 0.66 $ 1.53 $ 1.52
========== ========== =========== ===========
Average Number of Shares Outstanding 44.0 43.6 43.9 43.5
Average Number of Dilutive Shares Outstanding 44.3 44.2 44.3 44.1
See Notes to Condensed Consolidated Financial Statements.
ALEXANDER & BALDWIN, INC. AND SUBSIDIARIES
Industry Segment Data, Net Income
(In millions)
Three Months Ended Six Months Ended
June 30, June 30,
2006 2005 2006 2005
---- ---- ---- ----
Revenue:
Transportation:
Ocean transportation $ 243.6 $ 221.0 $ 462.9 $ 427.2
Logistics services 116.4 106.6 224.8 202.7
Real Estate:
Leasing 24.4 21.3 49.0 43.2
Sales 36.8 14.6 60.6 60.5
Less amounts reported in discontinued
operations (37.5) (2.6) (61.7) (29.8)
Food Products 37.8 32.2 53.3 54.6
Reconciling Items (3.3) (1.9) (9.4) (3.4)
---------- ---------- ----------- -----------
Total revenue $ 418.2 $ 391.2 $ 779.5 $ 755.0
========== ========== =========== ===========
Operating Profit, Net Income:
Transportation:
Ocean transportation $ 24.4 $ 38.7 $ 42.7 $ 68.4
Logistics services 5.3 3.6 10.0 6.6
Real Estate:
Leasing 12.2 10.5 24.3 21.2
Sales 10.9 4.8 38.0 21.3
Less amounts reported in discontinued
operations (15.6) (1.0) (31.2) (8.4)
Food Products 3.1 0.3 9.6 9.3
---------- ---------- ----------- -----------
Total operating profit 40.3 56.9 93.4 118.4
Loss on Investment -- (2.2) -- (2.2)
Interest Expense (3.0) (3.0) (6.2) (5.8)
General Corporate Expenses (5.1) (5.2) (10.3) (10.5)
---------- ---------- ----------- -----------
Income From Continuing Operations Before
Income Taxes 32.2 46.5 76.9 99.9
Income Taxes (11.7) (17.7) (28.7) (38.0)
---------- ---------- ----------- -----------
Income From Continuing Operations 20.5 28.8 48.2 61.9
Discontinued Operations (net of income taxes) 9.7 0.6 19.4 5.2
---------- ---------- ----------- -----------
Net Income $ 30.2 $ 29.4 $ 67.6 $ 67.1
========== ========== =========== ===========
See Notes to Condensed Consolidated Financial Statements.
ALEXANDER & BALDWIN, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In millions)
June 30, December 31,
2006 2005
---- ----
ASSETS
Current Assets:
Cash and cash equivalents $ 34 $ 57
Accounts and notes receivable, net 187 177
Inventories 32 18
Real estate held for sale 2 9
Deferred income taxes 16 16
Prepaid expenses and other assets 25 25
Accrued withdrawals, net to Capital Construction Fund -- 1
--------- ---------
Total current assets 296 303
--------- ---------
Investments 124 154
--------- ---------
Real Estate Developments 105 71
--------- ---------
Property, at cost 2,292 2,222
Less accumulated depreciation and amortization 951 933
--------- ---------
Property - net 1,341 1,289
--------- ---------
Capital Construction Fund 112 93
--------- ---------
Other Assets 179 161
--------- ---------
Total $ 2,157 $ 2,071
========= =========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable and current portion of long-term debt $ 54 $ 31
Accounts payable 135 134
Other 78 89
--------- ---------
Total current liabilities 267 254
--------- ---------
Long-term Liabilities:
Long-term debt 353 296
Deferred income taxes 437 415
Post-retirement benefit obligations 48 47
Other 64 45
--------- ---------
Total long-term liabilities 902 803
--------- ---------
Commitments and Contingencies
Shareholders' Equity:
Capital stock 35 36
Additional capital 174 175
Deferred compensation -- (6)
Accumulated other comprehensive loss (7) (7)
Retained earnings 797 827
Cost of treasury stock (11) (11)
--------- ---------
Total shareholders' equity 988 1,014
--------- ---------
Total $ 2,157 $ 2,071
========= =========
See Notes to Condensed Consolidated Financial Statements.
ALEXANDER & BALDWIN, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In millions)
Six Months Ended
June 30,
2006 2005
---- ----
Cash Flows from Operating Activities $ 40 $ 129
--------- ---------
Cash Flows from Investing Activities:
Capital expenditures (87) (174)
Proceeds from disposal of property and other assets 31 19
Deposits into Capital Construction Fund (22) (158)
Withdrawals from Capital Construction Fund 4 146
Sales (purchases) of investments, net 21 (13)
--------- ---------
Net cash used in investing activities (53) (180)
--------- ---------
Cash Flows from Financing Activities:
Proceeds from issuances of long-term debt 70 105
Payments of long-term debt (13) (10)
Proceeds (payments) from short-term borrowings, net 23 (5)
Proceeds from issuances of capital stock, including
excess tax benefit 3 8
Repurchase of capital stock (72) --
Dividends paid (21) (20)
--------- ---------
Net cash provided by (used in) financing activities (10) 78
--------- ---------
Net (Decrease) Increase in Cash and Cash Equivalents $ (23) $ 27
========= =========
Other Cash Flow Information:
Interest paid, net of amounts capitalized $ (6) $ (7)
Income taxes refunded (paid) (32) 22
Other Non-cash Information:
Depreciation expense 41 41
Tax-deferred real estate sales 58 28
Tax-deferred property purchases (33) (28)
Debt assumed in real estate acquisition -- 11
Common stock dividends declared but not yet paid 11 10
See Notes to Condensed Consolidated Financial Statements.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(1) The Condensed Consolidated Financial Statements are unaudited. Because
of the nature of the Company's operations, the results for interim
periods are not necessarily indicative of results to be expected for
the year. While these statements reflect all normal recurring
adjustments that are, in the opinion of management, necessary for fair
presentation of the results of the interim period, they do not include
all of the information and footnotes required by U.S. generally
accepted accounting principles for complete financial statements.
Therefore, the interim Condensed Consolidated Financial Statements
should be read in conjunction with the Consolidated Financial
Statements and Notes thereto included in the Company's annual report
filed on Form 10-K for the year ended December 31, 2005.
(2) On July 13, 2006, the Financial Accounting Standards Board (FASB)
issued FASB Interpretation No. 48, "Accounting for Uncertainty in
Income Taxes--an interpretation of FASB Statement No. 109" (FIN 48).
This Interpretation prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a
tax position taken or expected to be taken in a tax return. This
Interpretation also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. The new rules will be effective for the Company in 2007. At
this time, the Company has not completed its review and assessment of
the impact of adoption of FIN 48.
(3) The 2006 estimated effective income tax rate of 37.5 percent differs
from the statutory rate, due primarily to a land donation and tax
credits.
(4) Commitments and Contingencies: Commitments and financial arrangements
that are not recorded on the Company's balance sheet at June 30, 2006,
other than operating lease obligations, included the following (in
millions):
Vessel purchase (a) $ 147
Guarantee of HS&TC debt (b) $ --
Standby letters of credit (c) $ 20
Bonds (d) $ 8
Benefit plan withdrawal obligations (e) $ 65
These amounts are not recorded on the Company's balance sheet and, with
the exception of item (a), it is not expected that the Company or its
subsidiaries will be called upon to advance funds under these
commitments.
(a) In February 2005, Matson Navigation Company, Inc.
("Matson") entered into an agreement with Kvaerner
Philadelphia Shipyard Inc. to purchase two
containerships. The first of these two ships, the MV
Manulani, was delivered during the second quarter of
2005, and the second ship, the MV Maunalei, was
delivered in July 2006, as further described in
footnote 11. The purchase price for the MV Maunalei
was approximately $147 million. The purchase of the
MV Maunalei was funded with the Capital Construction
Fund ("CCF"), cash from operations and draws on a
revolving credit facility with DnB NOR Bank ASA and
ING Bank N.V. Payment in full was made upon the
delivery of the containership and no further
obligations exist after the date of the delivery. As
of June 30, 2006, no obligation was recorded on the
financial statements for the MV Maunalei because
conditions necessary to record either a liability or
an asset were not met.
(b) The Company has guaranteed up to $21.5 million of a
$30 million Hawaiian Sugar & Transportation Cooperative
("HS&TC") revolving credit line. HS&TC is a raw-sugar
marketing and transportation cooperative that is used
to market and transport the Company's raw sugar to
C&H Sugar Company, Inc. ("C&H"). The Company is a
member of HS&TC. Under normal circumstances, the
guarantee would not exceed $15 million. The amount
would only increase to $21.5 million if the amounts
owed by C&H are outstanding beyond normal 10-day terms.
No amounts were borrowed under the facility at the end
of the second quarter.
(c) At June 30, 2006, the Company has arranged for standby
letters of credit totaling $20 million. This includes
letters of credit, totaling approximately $14 million,
which enable the Company to qualify as a self-insurer
for state and federal workers' compensation
liabilities. This balance also includes approximately
$6 million for performance guarantees related to real
estate projects.
(d) Consists of $6 million in U.S. customs bonds, $1
million relates to real estate construction projects in
Hawaii, and $1 million relates to ocean transportation
matters.
(e) The withdrawal liabilities for multiemployer pension
plans, in which Matson is a participant, aggregated
approximately $65 million as of the most recent
valuation dates. Management has no present intention of
withdrawing from and does not anticipate termination of
any of the aforementioned plans.
Other Contingencies: On June 14, 2006, the Company, Kukui'ula
Development Company (Hawaii), LLC ("Kukui'ula"), and various DMB
entities ("DMB") entered into a General Contract of Indemnity
("Indemnity") in favor of Travelers Casualty and Surety Company of
America ("Travelers"). The Indemnity was described in the Company's
Form 8-K dated June 14, 2006 and filed with the Securities and Exchange
Commission on June 16, 2006. The Indemnity was entered into in
connection with Travelers' execution of an agreement with the Kukui'ula
joint venture for the delivery of one or more bonds. The bonds are
being issued to secure final subdivision approvals, which will allow
for closing of the Kukui'ula lots to take place, and will cover various
construction activities at Kukui'ula, such as project amenities, roads,
utilities and other infrastructure, and subdivision improvements.
Under the Indemnity, the Company, Kukui'ula, and DMB, jointly and
severally, agree to indemnify and exonerate Travelers from all loss
which Travelers incurs in connection with any of the bond(s) issued. In
connection with the Indemnity, the Company, Kukui'ula, and DMB have
separately entered into a Mutual Indemnification Agreement
("Agreement") under which the parties agree that they shall each be
proportionately liable (60% for DMB and 40% for the Company) for all
payments required to be made under the Indemnity.
The Company accounts for guarantees in accordance with FASB
Interpretation No. 45 (" FIN 45"), "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees
of Indebtedness of Others." Under the provisions of FIN 45, the Company
recorded a liability for the Indemnity based on its fair value. The
fair value of the liability recorded by the Company in connection with
the Indemnity was not material.
Financing Agreement: On April 20, 2006, the Company entered into a
three-year unsecured note purchase and private shelf agreement with
Prudential Investment Management, Inc. and its affiliates
(collectively, "Prudential") under which the Company may issue notes in
an aggregate amount up to $400 million less the sum of all principal
amounts then outstanding on any notes issued by the Company or any of
its subsidiaries to Prudential and the amount of any such notes then
committed to be purchased by Prudential. The Agreement also provides
for the commitment by Prudential to purchase and, subject to a right of
cancellation by the Company, the commitment by the Company to issue
three new series of senior promissory notes totaling $125 million. The
note purchase and shelf agreement is more fully described in a Form 8-K
filed on April 21, 2006.
Litigation: The Company and certain subsidiaries are parties to various
legal actions and are contingently liable in connection with claims and
contracts arising in the normal course of business, the outcome of
which, in the opinion of management after consultation with legal
counsel, will not have a material adverse effect on the Company's
financial position or results of operations.
(5) Earnings Per Share: The denominator used to compute basic and diluted
earnings per share is as follows (in millions):
Three Months Ended Six Months Ended
June 30, June 30,
2006 2005 2006 2005
---- ---- ---- ----
Denominator for basic EPS - weighted average shares
Effect of dilutive securities: 44.0 43.6 43.9 43.5
Employee/director stock options and
non-vested restricted stock 0.3 0.6 0.4 0.6
------ ------ ------ ------
Denominator for diluted earnings per share 44.3 44.2 44.3 44.1
====== ====== ====== ======
(6) Share-Based Compensation: The Company may grant incentive and
non-qualified options to purchase shares of the Company's stock at an
exercise price equal to the fair market value at the grant date, as
determined by the Compensation Committee of the Board of Directors. The
options vest ratably over three years and, if not exercised, expire 10
years after grant. Shares issued as a result of stock option exercises
are funded with the issuance of new shares. Shares tendered to the
Company in connection with stock option exercises are retired.
The Company may also issue shares of the Company's common stock, in
connection with the stock option plans, as a reward for past service
rendered or as an incentive for future service. Service-based
restricted shares generally vest over three years. The Company may also
issue performance-based restricted shares that vest one year after
grant, with the number of shares earned based on the achievement of
annual financial targets established at the beginning of the fiscal
year.
The Company's various stock option plans are more fully described in
its most recent Form 10-K and in other filings with the Securities and
Exchange Commission. As of June 30, 2006, 1,463,588 shares have been
authorized for issuance under the equity compensation plans but had not
been granted.
On January 1, 2006, the Company adopted Statement of Financial
Accounting Standards No. 123 (revised 2004), "Share-Based Payment"
(SFAS No. 123R), which requires the measurement and recognition of
compensation expense for all share-based payment awards made to
employees and directors. Prior to January 1, 2006, the Company
accounted for share-based compensation under Accounting Principles
Board ("APB") Opinion No. 25, which required recognition of
compensation expense based on the intrinsic value of the equity
instrument awarded. Consequently, no share-based compensation expense
for stock option grants was reflected in net income since all options
granted had an exercise price equal to the market value of the
underlying common stock on the date of grant. If the Company had
applied the fair value recognition provisions of SFAS No. 123, as
amended by SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure," the effect on net income and earnings per
share for the three and six month periods ended June 30, 2005 would
have been as follows (in millions, except per-share amounts):
2005
---------------------------------------
Quarter Six Months
Ended Ended
June 30 June 30
------- -------
Net Income:
As reported $ 29.4 $ 67.1
Stock-based compensation expense determined under
fair value based method for all awards, net of related
tax effects (0.4) (0.8)
--------- --------
Pro forma $ 29.0 $ 66.3
========= ========
Net Income Per Share:
Basic, as reported $ 0.67 $ 1.54
Basic, pro forma $ 0.66 $ 1.52
Diluted, as reported $ 0.66 $ 1.52
Diluted, pro forma $ 0.65 $ 1.50
--------------------------------------------------------------------------------------------------------
SFAS No. 123R requires companies to estimate the fair value of
share-based payment awards on the date of grant using an option-pricing
model. The Company estimates the grant-date fair value of its stock
options using a Black-Scholes valuation model, consistent with the
provisions of SFAS No. 123R and Securities and Exchange Commission
("SEC") Staff Accounting Bulletin No. 107, "Share-Based Payment," using
the range of assumptions provided in the table below:
2006 2005
---- ----
Expected volatility 22.1%-22.7% 22.2%-22.3%
Expected term (in years) 6.3-8.1 6.4
Risk-free interest rate 4.5%-5.1% 3.9%-4.0%
Dividend yield 1.7%-2.4% 1.9%-2.2%
Fair value of options granted $10.56-$14.86 $9.70-$10.36
o Expected volatility was primarily determined using the
historical volatility of A&B common stock over a 6-year
period, but the Company may also consider future events
that it reasonably concludes marketplace participants
might consider. Accordingly, the Company believes that the
expected volatility estimate is representative of the
stock's future volatility over the expected term of its
employee share options. An increase in the expected
volatility assumption will increase stock compensation
expense.
o The expected term of the awards represents expectations of
future employee exercise and post-vesting termination
behavior and was primarily based on historical experience.
The Company analyzed various groups of employees and
considered expected or unusual trends that would likely
affect this assumption and determined that the historical
term of 6.7 years was reasonable for 2006. An increase in
the expected term assumption will increase stock
compensation expense.
o The risk free interest rate was based on U.S. Government
treasury yields for periods equal to the expected term of
the option on the grant date. An increase in the risk-free
interest rate will increase stock compensation expense.
o The expected dividend yield is based on the Company's
current and historical dividend policy. An increase in the
dividend yield will decrease stock compensation expense.
Application of alternative assumptions could produce significantly
different estimates of the fair value of stock-based compensation, and
consequently, the related amounts recognized in the Condensed
Consolidated Statements of Income.
Activity in the Company's stock option plans for the first two quarters
of 2006 was as follows (in thousands, except exercise price amounts):
Employee Plans Directors' Plans
------------------------- ------------------------ Weighted
1998 1989 Average
1998 1989 Directors' Directors' Total Exercise
Plan Plan Plan Plan Shares Price
---- ---- ---------- ---------- ------ ---------
December 31, 2005 1,190.1 38.2 215.8 42.0 1,486.1 $ 31.16
Granted 174.1 -- 56.0 -- 230.1 $ 51.54
Exercised (62.6) (11.2) (6.0) (12.0) (91.8) $ 26.72
Forfeited & Expired (20.1) -- -- -- (20.1) $ 40.92
---------- ---------- -------- ------- -----------
June 30, 2006 1,281.5 27.0 265.8 30.0 1,604.3 $ 34.21
========== ========== ======== ======== ===========
Exercisable 872.4 27.0 140.6 30.0 1,070.0 $ 29.19
---------- ---------- -------- -------- -----------
The following table summarizes stock option information as of June 30,
2006 (excludes restricted stock, in thousands, except exercise
price amounts):
Weighted Weighted
Options Average Weighted Options Average
Range of Outstanding Remaining Average Exercisable Price of
Exercise as of Contractual Life Exercise as of Exercisable
Prices 6/30/2006 (in Years) Price 6/30/2006 Options
------------------- --------- ------------- ------------ --------- -------
$20.00 - 24.00 95.9 3.3 $ 21.39 95.9 $ 21.39
$24.01 - 28.00 453.3 5.5 $ 26.29 453.3 $ 26.29
$28.01 - 32.00 211.5 4.3 $ 28.54 209.4 $ 28.51
$32.01 - 36.00 355.5 7.4 $ 33.48 223.0 $ 33.48
$36.01 - 40.00 0.2 5.1 $ 37.98 -- --
$40.01 - 44.00 74.8 7.5 $ 40.46 24.0 $ 40.38
$44.01 - 48.00 191.2 8.5 $ 44.45 64.4 $ 44.45
$48.01 - 53.00 221.9 9.6 $ 51.59 -- --
------- -------
$20.00 - 53.00 1,604.3 6.7 $ 34.21 1,070.0 $ 29.19
======= =======
A summary of the compensation cost and other measures related to
share-based payments is as follows (in millions):
Three Months Ended Six Months Ended
June 30, June 30,
2006 2005 2006 2005
---- ---- ---- ----
Share-based expense (net of estimated
forfeitures):
Stock options $ 0.7 $ -- $ 1.4 $ --
Restricted stock 1.4 0.6 2.6 1.0
---------- ---------- ----------- -----------
Total share-based expense $ 2.1 $ 0.6 $ 4.0 $ 1.0
========== ========== =========== ===========
Income tax benefit realized $ 0.2 $ 0.4 $ 1.9 $ 2.5
Intrinsic value of options exercised $ 0.5 $ 0.9 $ 2.1 $ 5.9
Fair value of stock vested $ -- $ -- $ 3.0 $ 0.6
As of June 30, 2006, there was $4.9 million of total unrecognized
compensation cost related to unvested stock options. That cost is
expected to be recognized over a weighted average period of
approximately 1.6 years.
The following table summarizes restricted stock information as of June
30, 2006 (in thousands, except weighted-average, grant-date fair value
amounts):
Weighted
Restricted Average
Stock Grant-Date
Shares Fair Value
------ ----------
December 31, 2005 184.3 $ 41.38
Granted 128.4 $ 52.37
Vested (57.1) $ 41.97
Forfeited (8.0) $ 38.06
-------
June 30, 2006 247.6 $ 46.73
=======
Unrecognized compensation cost related to unvested restricted stock was
$9.2 million, with the cost expected to be recognized over a weighted
average period of 1.4 years.
(7) Accounting for and Classification of Discontinued Operations: As
required by Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS
No. 144), the sales of certain income-producing assets are classified
as discontinued operations if (i) the operations and cash flows of the
assets can be clearly distinguished from the remaining assets of the
Company, (ii) the cash flows that are specific to the assets sold have
been, or will be, eliminated from the ongoing operations of the
Company, (iii) the Company will not have a significant continuing
involvement in the operations of the assets sold, and (iv) the amount
is considered material. Certain assets that are "held for sale," based
on the likelihood and intention of selling the property within 12
months, are also treated as discontinued operations. Depreciation on
these assets is discontinued upon reclassification. Sales of land,
residential houses, and office condominium units are generally
considered inventory and are not included in discontinued operations.
Discontinued operations were as follows (in millions):
Quarter Ended Six Months Ended
June 30, June 30,
-------- --------
2006 2005 2006 2005
---- ---- ---- ----
Discontinued Operations (net of tax)
Sales of Assets $ 9.4 $ -- $ 18.7 $ 3.9
Leasing Operations 0.3 0.6 0.7 1.3
-------- -------- -------- --------
Total $ 9.7 $ 0.6 $ 19.4 $ 5.2
======== ======== ======== ========
(8) Other Comprehensive Income for the three and six months ended June 30,
2006 and 2005 was as follows (in millions):
Quarter Ended Six Months Ended
June 30, June 30,
-------- --------
2006 2005 2006 2005
---- ---- ---- ----
Net Income $ 30.2 $ 29.4 $ 67.6 $ 67.1
Company's share of investee's
minimum pension liability
adjustment -- (0.4) 0.1 (0.4)
Change in valuation of derivative (0.1) -- (0.1) 0.1
-------- -------- -------- --------
Comprehensive Income $ 30.1 $ 29.0 $ 67.6 $ 66.8
======== ======== ======== ========
(9) Pension and Post-retirement Plans: The Company has defined benefit
pension plans that cover substantially all non-bargaining unit and
certain bargaining unit employees. The Company also has unfunded
non-qualified plans that provide benefits in excess of the amounts
permitted to be paid under the provisions of the tax law to
participants in qualified plans. The assumptions related to discount
rates, expected long-term rates of return on invested plan assets,
salary increases, age, mortality and health care cost trend rates,
along with other factors, are used in determining the assets,
liabilities and expenses associated with pension benefits. Management
reviews the assumptions annually with its independent actuaries, taking
into consideration existing and future economic conditions and the
Company's intentions with respect to these plans. Management believes
that its assumptions and estimates for 2006 are reasonable. Different
assumptions, however, could result in material changes to the assets,
obligations and costs associated with benefit plans.
The Components of Net Periodic Benefit Cost for the second quarter of
2006 and 2005 were as follows (in millions):
Pension Benefits Post-retirement Benefits
---------------- ------------------------
2006 2005 2006 2005
---- ---- ---- ----
Service Cost $ 1.9 $ 1.6 $ 0.2 $ 0.2
Interest Cost 4.1 4.0 0.8 0.8
Expected Return on Plan Assets (6.5) (6.1) -- --
Amortization of Prior Service Cost 0.1 0.1 -- --
Amortization of Net (Gain) Loss 0.4 0.4 0.3 0.3
-------- -------- -------- --------
Net Periodic Benefit Cost $ -- $ -- $ 1.3 $ 1.3
======== ======== ======== ========
The Components of Net Periodic Benefit Cost for the first half of 2006
and 2005 were as follows (in millions):
Pension Benefits Post-retirement Benefits
---------------- ------------------------
2006 2005 2006 2005
---- ---- ---- ----
Service Cost $ 3.7 $ 3.0 $ 0.5 $ 0.5
Interest Cost 8.2 8.0 1.6 1.6
Expected Return on Plan Assets (13.0) (12.2) -- --
Amortization of Prior Service Cost 0.2 0.2 -- --
Amortization of Net (Gain) Loss 0.8 0.8 0.5 0.6
-------- -------- -------- --------
Net Periodic Benefit Cost (Credit) $ (0.1) $ (0.2) $ 2.6 $ 2.7
======== ======== ======== ========
The 2006 return on plan assets is expected to be nearly the same as the
sum of the service cost, interest cost and amortization components,
resulting in an expected net periodic pension credit of approximately
$0.2 million for 2006. No contributions to the Company's pension plans
are expected to be required during 2006.
(10) Accelerated Share Repurchase Program: On December 9, 2004, A&B's Board
of Directors authorized A&B to repurchase up to two million shares of
its common stock through December 31, 2006. In June 2006, A&B purchased
200,000 shares on the open market at an average price of $42.35.
Additionally, the Company also entered into an accelerated share
repurchase agreement ("ASR") with Goldman, Sachs & Co. on June 27, 2006
to repurchase shares of A&B's common stock for an aggregate purchase
price of approximately $63 million, which is more fully described in a
Form 8-K filed on July 11, 2006. The maximum average price per share
that will be paid under the ASR is $46.83, which is based on 984,000
and 361,342 shares delivered on June 30 and July 12, 2006,
respectively. The average price per share paid to date under the ASR
may not be representative of the final average repurchase price per
share because A&B may receive additional shares for no additional
consideration. Under the terms of the ASR, the Company may receive up
to an additional 184,099 shares upon termination of the agreement in a
third installment based on the volume weighted average price of A&B's
common stock from July 8, 2006 through to the end of the termination
period, which may be determined by Goldman in its discretion from
September 8, 2006 through November 10, 2006. A&B has no further
obligation to provide additional cash or to issue additional shares
under the agreement, and consequently, any additional shares received
would reduce the final average price paid per share. The final average
repurchase price per share under the ASR will range from $41.19 to
$46.83 based on the collar established by the agreement. Through July
28, 2006, our total share repurchases totaled 1,545,342 shares for
$71.5 million at an average price of $46.25 per share. Upon completion
of the ASR, A&B will have repurchased between 1,545,342 and 1,729,441
shares of its stock during 2006 and will have between 270,559 and
454,658 shares remaining under its existing share repurchase
authorization.
(11) Subsequent Events: On July 12, 2006, Matson took delivery of its newest
ship, the MV Maunalei. The purchase price for the MV Maunalei was $147
million. The purchase of the MV Maunalei was funded with the CCF, cash
from operations, and borrowings under the DnB NOR revolving credit
facility. The amount drawn under the DnB NOR revolving credit facility
upon delivery of the ship totaled approximately $70 million, of which
$36 million was applied to the purchase price of the ship and the
remainder was used for other general corporate purposes.
On July 12, 2006, a bill prohibiting residential development and the
sale of the State's fee simple interest in the Kaka'ako Waterfront
project was enacted into law. Consequently, the Company has terminated
its development activities related to the Kaka'ako Waterfront project.
The incurred costs related to the project were immaterial and were
expensed.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
The following analysis of the consolidated financial condition and results of
operations of Alexander & Baldwin, Inc. and its subsidiaries (collectively, the
"Company") should be read in conjunction with the condensed consolidated
financial statements and related notes thereto included in Item 1 of this Form
10-Q.
FORWARD-LOOKING STATEMENTS
The Company, from time to time, may make or may have made certain
forward-looking statements, whether orally or in writing, such as forecasts and
projections of the Company's future performance or statements of management's
plans and objectives. These statements are "forward-looking" statements as that
term is defined in the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements may be contained in, among other things, Securities
and Exchange Commission ("SEC") filings, such as the Forms 10-K, 10-Q and 8-K,
press releases made by the Company, the Company's Internet Web sites (including
Web sites of its subsidiaries), and oral statements made by the officers of the
Company. Except for historical information contained in these written or oral
communications, such communications contain forward-looking statements. These
forward-looking statements are not guarantees of future performance, and involve
a number of risks and uncertainties that could cause actual results to differ
materially from those projected in the statements, including, but not limited to
those matters discussed in Item 1A of the Company's 2005 10-K.
CONSOLIDATED REVENUE & NET INCOME
Consolidated - Second quarter of 2006 compared with 2005
-------------------------------------------------------------------------------------------
Quarter Ended June 30,
-------------------------------------------------------------------------------------------
(dollars in millions) 2006 2005 Change
-------------------------------------------------------------------------------------------
Revenue $ 418.2 $ 391.2 7%
Cost of goods sold, services and rentals $ 347.7 $ 308.1 13%
Selling, general and administrative $ 36.3 $ 33.4 9%
Loss on investment $ -- $ 2.2 -100%
Income taxes $ 11.7 $ 17.7 -34%
-------------------------------------------------------------------------------------------
Net income $ 30.2 $ 29.4 3%
-------------------------------------------------------------------------------------------
Consolidated revenue for the second quarter of 2006 increased $27.0 million, or
7 percent, compared with the second quarter of 2005. This increase was due
principally to $22.6 million higher revenue for ocean transportation, $9.8
million growth in logistics services revenue, $5.6 million higher revenue for
food products and $5.0 million higher revenue from real estate leasing (after
excluding leasing revenue from assets classified as discontinued operations),
partially offset by $14.5 million in lower revenue from real estate sales (after
excluding revenue from discontinued operations). The reasons for the revenue
growth are described below, by business segment, in the Analysis of Operating
Revenue and Profit.
Costs of goods sold, services and rentals for the second quarter of 2006
increased $39.6 million, or 13 percent, compared with the second quarter of 2005
due to $36.7 million higher costs for ocean transportation, $7.9 million in
higher purchased transportation costs at the Matson Integrated Logistics
business, $3.1 million in higher costs for the food products segment (primarily
as a result of higher sugar sales volume), partially offset by $9.1 million
lower cost of real estate sales (after excluding real estate sales classified as
discontinued operations).
Selling, general and administrative costs for the second quarter of 2006 were
$2.9 million, or 9 percent, higher than the second quarter of 2005 due
principally to higher professional service fees, salaries, and related employee
benefit costs.
Income taxes were lower than the second quarter of 2005, on a percentage basis,
due to a change in the effective income tax rate. The effective tax rate for
2006 was reduced from 38% to 37.5% as a result of a land donation and tax
credits.
Consolidated - First half of 2006 compared with 2005
-------------------------------------------------------------------------------------------
Six Months Ended June 30,
-------------------------------------------------------------------------------------------
(dollars in millions) 2006 2005 Change
-------------------------------------------------------------------------------------------
Revenue $ 779.5 $ 755.0 3%
Cost of goods sold, services and rentals $ 641.4 $ 585.5 10%
Selling, general and administrative $ 72.1 $ 65.5 10%
Loss on investment $ -- $ 2.2 -100%
Income taxes $ 28.7 $ 38.0 -24%
-------------------------------------------------------------------------------------------
Net income $ 67.6 $ 67.1 1%
-------------------------------------------------------------------------------------------
Consolidated revenue for the first half of 2006 increased $24.5 million, or 3
percent, compared with the first half of 2005. This increase was due principally
to $35.7 million higher revenue for ocean transportation, $22.1 million growth
in logistics services revenue, and $9.0 million higher revenue from
real estate leasing (after excluding leasing revenue from assets classified as
discontinued operations), partially offset by $34.9 million in lower revenue
from real estate sales (after excluding revenue from discontinued operations).
The reasons for the revenue growth are described below, by business segment, in
the Analysis of Operating Revenue and Profit.
Costs of goods sold, services and rentals for the first half of 2006 increased
$55.9 million, or 10 percent, compared with the first half of 2005 due to $58.7
million in higher costs for ocean transportation, $17.8 million in higher
purchased transportation costs for the logistics business, partially offset by
$19.0 million in lower cost of real estate sales (after excluding real estate
sales classified as discontinued operations) and $3.3 million gain on the sale
of two surplus and obsolete vessels.
Selling, general and administrative costs for the first half of 2006 were $6.6
million, or 10 percent, higher than the first half of 2005 due to the same
factors cited for the second quarter increase.
Income taxes were lower than the first half of 2005 due primarily to the same
factors cited for the second quarter decrease.
ANALYSIS OF OPERATING REVENUE AND PROFIT
TRANSPORTATION INDUSTRY
Ocean Transportation - Second quarter of 2006 compared with 2005
--------------------------------------------------------------------------------
Quarter Ended June 30,
--------------------------------------------------------------------------------
(dollars in millions) 2006 2005 Change
--------------------------------------------------------------------------------
Revenue $ 243.6 $ 221.0 10%
Operating profit $ 24.4 $ 38.7 -37%
--------------------------------------------------------------------------------
Volume (Units)
Hawaii containers 44,600 44,700 --
Hawaii automobiles 33,800 43,300 -22%
Guam containers 3,900 4,200 -7%
China containers 7,500 -- NM
--------------------------------------------------------------------------------
Ocean Transportation revenue for the second quarter of 2006 was $22.6 million,
or 10 percent, higher than the second quarter of 2005. Of this increase,
approximately $16.3 million was due to overall container volume increases for
Matson's services, $13.3 million was due to increases in fuel surcharge
revenues, and $4.6 million was due to improved yields and cargo mix. These
increases were partially offset by approximately $8.9 million from the loss of
vessel charter revenue resulting from the expiration of the APL Alliance in the
first quarter of 2006. Matson's Hawaii automobile volume for the quarter was 22
percent lower than the first quarter of last year, due primarily to the impact
of reduced auto manufacturer incentives for rental car agencies, which resulted
in lower rental car turnover, as well as competitive pressures. Total Hawaii
container volume was down slightly from the second quarter of 2005, reflecting
primarily a reduction in eastbound volumes, including lower shipments of
agricultural products and lower military-related household good movements. Guam
container volume was down slightly from the second quarter of 2005, primarily
due to the transition in vessel schedules.
Operating profit was $14.3 million, or 37 percent, lower than the second quarter
of 2005. This decrease was primarily the result of the following operating
expense changes, which offset revenue increases. Direct fuel costs increased by
$15.9 million, vessel operating and overhead expenses increased $5.6 million
primarily due to the China service startup, and terminal handling costs
increased $3.8 million due to increased rates. Outside transportation costs,
which include barge and trucking expenses paid to third parties, increased $2.4
million and G&A expense increased $2.1 million. Earnings from Matson's SSAT
joint venture contributed $0.7 million more than the second quarter of 2005.
Earnings from joint ventures are not included in revenue, but are included in
operating profit.
Ocean Transportation - First half of 2006 compared with 2005
--------------------------------------------------------------------------------
Six Months Ended June 30,
--------------------------------------------------------------------------------
(dollars in millions) 2006 2005 Change
--------------------------------------------------------------------------------
Revenue $ 462.9 $ 427.2 8%
Operating profit $ 42.7 $ 68.4 -38%
--------------------------------------------------------------------------------
Volume (Units)
Hawaii containers 86,400 86,100 --
Hawaii automobiles 65,600 78,900 -17%
Guam containers 7,700 8,200 -6%
China containers 9,500 -- NM
--------------------------------------------------------------------------------
Ocean Transportation revenue for the first half of 2006 was $35.7 million, or 8
percent, higher than the first half of 2005. Of this increase, approximately
$21.0 million was due to increases in fuel surcharge revenues, $17.9 million was
due to overall container volume increases for Matson's services, and $7.2
million was due to improved yields and cargo mix. These increases were partially
offset by $11.4 million of lower vessel charter revenue, resulting from the
expiration of the APL Alliance. Total Hawaii automobile volume was 17 percent
lower, due primarily to competitive pressures and reduced shipments to rental
agencies as noted previously. Guam container volume was 6 percent lower than in
the first half of 2005, due primarily to changes in vessel schedules.
Operating profit was $25.7 million, or 38 percent, lower than the first half of
2005. This decrease was primarily the result of the following operating expense
changes, which offset revenue increases. Direct fuel costs increased $28.2
million, vessel operating and overhead expenses increased $5.6 million primarily
due to the China service startup, and terminal handling costs increased $7.4
million due to increased rates. Outside transportation costs increased $3.8
million and G&A expense increased $3.3 million. Matson's SSAT joint venture
contributed $3.6 million less than the first half of 2005, due primarily to a
favorable adjustment made during the first half of 2005. Earnings from this
venture are not included in revenue, but are included in operating profit. These
decreases were partially offset by a $3.3 million gain on the sale of two
surplus and obsolete vessels.
Logistics Services - Second quarter of 2006 compared with 2005
--------------------------------------------------------------------------------
Quarter Ended June 30,
--------------------------------------------------------------------------------
(dollars in millions) 2006 2005 Change
--------------------------------------------------------------------------------
Revenue $ 116.4 $ 106.6 9%
Operating profit $ 5.3 $ 3.6 47%
--------------------------------------------------------------------------------
Integrated logistics revenue increased by $9.8 million, or 9 percent, for the
second quarter of 2006 compared with the second quarter of 2005. This growth was
the result of continued improvements in yields and an 11 percent increase in
highway and less-than-truckload volumes, partially offset by lower volumes in
domestic and international intermodal services.
Integrated logistics operating profit increased by $1.7 million, or 47 percent,
for the second quarter of 2006 compared with the second quarter of 2005. The
increased operating profit was the result of higher yields in all service
categories and lower general and administrative costs as a percentage of
revenue.
The revenue for integrated logistics services includes the total amount billed
to customers for transportation services. The primary costs include purchased
transportation services. As a result, the operating profit margins for this
business are narrower than other A&B businesses. The primary operating profit
and investment risk for this business is the quality of receivables, which is
monitored closely.
Logistics Services - First half of 2006 compared with 2005
--------------------------------------------------------------------------------
Six Months Ended June 30,
--------------------------------------------------------------------------------
(dollars in millions) 2006 2005 Change
--------------------------------------------------------------------------------
Revenue $ 224.8 $ 202.7 11%
Operating profit $ 10.0 $ 6.6 52%
--------------------------------------------------------------------------------
Integrated logistics revenue increased by $22.1 million, or 11 percent, for the
first half of 2006 compared with the first half of 2005. This growth was the
result of continued improvements in mix of business and rates, and a 15 percent
increase in highway and less-than-truckload volumes, partially offset by a 22
percent decrease in international intermodal volume.
Integrated logistics operating profit increased by $3.4 million, or 52 percent,
for the first half of 2006 compared with the first half of 2005. The operating
profit improvement was the result of higher yields in all service categories and
lower general and administrative costs as a percentage of revenue.
REAL ESTATE INDUSTRY
Real estate leasing and sales revenue and operating profit are analyzed before
subtracting amounts related to discontinued operations. This is consistent with
how the Company's management evaluates and makes decisions for the Company's
real estate businesses. A discussion of discontinued operations for the real
estate business is included separately.
Leasing- Second quarter of 2006 compared with 2005
--------------------------------------------------------------------------------
Quarter Ended June 30,
--------------------------------------------------------------------------------
(dollars in millions) 2006 2005 Change
--------------------------------------------------------------------------------
Revenue $ 24.4 $ 21.3 15%
Operating profit $ 12.2 $ 10.5 16%
--------------------------------------------------------------------------------
Occupancy Rates:
Mainland 98% 95% 3%
Hawaii 98% 92% 6%
--------------------------------------------------------------------------------
Leasable Space (million sq. ft.):
Mainland 3.7 3.5 6%
Hawaii 1.5 1.7 -12%
--------------------------------------------------------------------------------
Real estate leasing revenue and operating profit for the second quarter of 2006
were 15 percent and 16 percent higher, respectively, than the amounts reported
for the second quarter of 2005. These increases were due principally to $2.8
million of revenue and $1.4 million of contribution margin from four properties
acquired subsequent to the second quarter of 2005, the results from the
completion of a new Oahu commercial development during the second half of 2005,
and higher interest income earned on 1031 escrow funds. The higher occupancy
rate for the Hawaii commercial leasing portfolio was principally due to the
addition of Kunia Shopping Center, a new Oahu commercial development that was
fully leased upon completion, the addition of Lanihau Shopping Center, a
fully-leased retail center in Kailua-Kona on the island of Hawaii subsequent to
the first half of 2005, and higher leasing activity at existing properties.
Leasing- First half of 2006 compared with 2005
--------------------------------------------------------------------------------
Six Months Ended June 30,
--------------------------------------------------------------------------------
(dollars in millions) 2006 2005 Change
--------------------------------------------------------------------------------
Revenue $ 49.0 $ 43.2 13%
Operating profit $ 24.3 $ 21.2 15%
--------------------------------------------------------------------------------
Occupancy Rates:
Mainland 97% 95% 2%
Hawaii 98% 91% 7%
--------------------------------------------------------------------------------
Real estate leasing revenue and operating profit for the first half of 2006 were
13 percent and 15 percent higher, respectively, than the amounts reported for
the first half of 2005. Additionally, the Hawaii commercial leasing portfolio's
occupancy rate increased by 7 percent. These increases were due to the same
reasons as cited for the quarter.
Real Estate Sales - Second quarter and first half of 2006 compared with 2005
--------------------------------------------------------------------------------
Quarter Ended June 30,
--------------------------------------------------------------------------------
(dollars in millions) 2006 2005 Change
--------------------------------------------------------------------------------
Revenue $ 36.8 $ 14.6 2.5x
Operating profit $ 10.9 $ 4.8 2.3x
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Six Months Ended June 30,
--------------------------------------------------------------------------------
(dollars in millions) 2006 2005 Change
--------------------------------------------------------------------------------
Revenue $ 60.6 $ 60.5 --
Operating profit $ 38.0 $ 21.3 78%
--------------------------------------------------------------------------------
2006 Second Quarter: Real estate sales revenue, before subtracting amounts
treated as discontinued operations, was $36.8 million and was principally
comprised of the sale of two retail centers in Phoenix, Arizona and one
commercial parcel on Maui. Operating profit for the second quarter of 2006
included the Company's share of $1.7 million in marketing and other operating
expenses of its real estate joint ventures.
2006 First Half: Revenue for the first half of 2006 also included first quarter
revenue of $23.8 million, principally related to the sales of a Maui office
building, four commercial parcels on Maui, a commercial property on Oahu and a
vacant parcel on Kauai. Operating profit for the first half of 2006 also
included $12.2 million for the Company's earnings from its real estate joint
ventures (which are not included in revenue for the segment). The $12.2
million in joint venture earnings principally relates to a portion of the
Company's earnings from its Hokua joint venture, which completed sales of all
247 residential condominium units in the first quarter.
2005 Second Quarter: Revenue for the second quarter of 2005, before subtracting
amounts treated as discontinued operations, was principally due to the receipt
of the final 80-percent installment payment of $14.1 million for a 30-acre
development parcel at Wailea. In addition to the profit contribution from that
sale, 2005 second quarter operating profit included $0.8 million for the
Company's share of earnings from its real estate joint ventures.
2005 First Half: Real estate sales for the first half of 2005 also included
first quarter sales revenue from the sale of a warehouse/distribution complex in
Ontario, California for $17.8 million, seven Maui and Oahu commercial properties
for $7.6 million, a residential development parcel and three residential
properties for $7.5 million, a service center/warehouse complex comprised of
three buildings in San Antonio, Texas for $6.3 million, and 5.5 office
condominium floors for $5.5 million. In addition to the profit contribution from
these sales, 2005 first half operating profit included approximately $1.8
million for the Company's share of earnings from its real estate joint ventures.
The mix of real estate sales in any year or quarter can be diverse. Sales can
include developed residential real estate, commercial properties, developable
subdivision lots, undeveloped land, and property sold under threat of
condemnation. The sale of undeveloped land and vacant parcels in Hawaii
generally provides a greater contribution to earnings than does the sale of
developed and commercial property, due to the low historical-cost basis of the
Company's Hawaii land. Consequently, real estate sales revenue trends, cash
flows from the sales of real estate and the amount of real estate held for sale
on the balance sheets do not necessarily indicate future profitability trends
for this segment. Additionally, the operating profit reported in each quarter
does not necessarily follow a percentage of sales trends because the cost basis
of property sold can differ significantly between transactions. The reporting of
real estate sales is also affected by the classification of certain real estate
sales as discontinued operations.
Real Estate Discontinued Operations - 2006 compared with 2005
The revenue and operating profit on real estate discontinued operations for the
second quarter and first half of 2006 and 2005 were as follows:
------------------------------------------------------------------------------------------------------------
Quarter Ended June 30, Six Months Ended June 30,
------------------------------------------------------------------------------------------------------------
(dollars in millions, before tax) 2006 2005 2006 2005
------------------------------------------------------------------------------------------------------------
Sales revenue $ 36.7 -- $ 59.6 $ 24.5
Leasing revenue $ 0.8 $ 2.6 $ 2.1 $ 5.3
Sales operating profit $ 15.0 -- $ 30.0 $ 6.3
Leasing operating profit $ 0.6 $ 1.0 $ 1.2 $ 2.1
------------------------------------------------------------------------------------------------------------
2006: The sales of two retail centers in Phoenix, Arizona for $35.6 million, an
office building on Maui for $15.7, and several commercial parcels in Hawaii.
Additionally, the revenue and expenses of a commercial parcel on Maui have been
classified as discontinued operations because of the Company's plan to sell this
property.
2005: The sales of one warehouse/distribution complex in Ontario, California,
for $17.8 million, one service center/warehouse complex, consisting of three
buildings in San Antonio, Texas, for $6.3 million, an office building in
Wailuku, Maui, two office buildings in downtown Honolulu, and the fee interest
in a parcel in Maui were included in discontinued operations.
The leasing revenue and operating profit noted above includes the results for
properties that were sold through June 30, 2006 and the operating results of a
commercial parcel on Maui that the Company intends to sell within the next 12
months. The leasing revenue and operating profit for the second quarter of 2005
have been restated to reflect property that was classified as discontinued
operations subsequent to June 30, 2005.
FOOD PRODUCTS INDUSTRY
Food Products - Second quarter of 2006 compared with 2005
--------------------------------------------------------------------------------
Quarter Ended June 30,
--------------------------------------------------------------------------------
(dollars in millions) 2006 2005 Change
--------------------------------------------------------------------------------
Revenue $ 37.8 $ 32.2 17%
Operating profit $ 3.1 $ 0.3 10.3x
--------------------------------------------------------------------------------
Tons sugar produced 61,400 58,400 5%
--------------------------------------------------------------------------------
Food products revenue increased 17 percent for the second quarter of 2006
compared with 2005 due mainly to $2.1 million in equipment rentals, repair
services and trucking, $1.6 million from higher bulk raw sugar sales stemming
from higher sugar prices and increased sales volume, $1.5 million from higher
power sales prices and volume, and $0.6 million in higher molasses sales prices.
Operating profit increased tenfold from the second quarter of 2005 due
principally to $1.5 million in higher power sales, $0.8 million in higher
equipment rentals, and $0.8 million in higher molasses and specialty sugar
sales.
Food Products - First half of 2006 compared with 2005
--------------------------------------------------------------------------------
Six Months Ended June 30,
--------------------------------------------------------------------------------
(dollars in millions) 2006 2005 Change
--------------------------------------------------------------------------------
Revenue $ 53.3 $ 54.6 -2%
Operating profit $ 9.6 $ 9.3 3%
--------------------------------------------------------------------------------
Tons sugar produced 62,200 77,900 -20%
--------------------------------------------------------------------------------
Food products revenue decreased 2 percent for the first half of 2006 compared
with 2005. Excluding the $5.5 million disaster relief payment received in 2005,
revenue increased 9 percent due mainly to $2.9 million from higher power sales,
$2.1 million in higher repair services and trucking revenue, $1.6 million in
higher specialty sugar and molasses sales, and $1.1 million in higher equipment
rentals and soil sales. Lower revenue of $4.2 million from lower sugar sales
partially offset the previously noted increases.
Operating profit was 3 percent higher than the first half of 2005. However,
excluding the $5.5 million disaster relief payment received in 2005, operating
profit improved more than 150 percent, primarily due to $2.9 million in higher
power sales, $1.5 million in higher equipment rentals, soil sales, repair
services and trucking, $0.9 million in higher sugar sales margin as a result of
higher sugar prices, and $0.4 in higher molasses sales.
Sugar production was 20 percent lower in 2006 than in 2005 because operations
commenced one month later, as planned by the Company, than in the prior year.
While the Company expects to make up the difference in production, any future
impacts to the harvesting schedule, or unanticipated impacts to yields, could
affect total year production.
As reported by national media, the island of Kauai experienced the heaviest
rainfall in its recent history during March. Based on preliminary inspections of
Company-owned reservoirs by both the Company and the State of Hawaii, it is
believed that the facilities are sound, although certain remedial action will
have to be taken. The Company is currently evaluating both the Kauai and the
Maui reservoirs for any necessary follow-up action; the ultimate cost of the
reservoir studies and remediation activities is not known at this time.
2006 OUTLOOK
The statements included herein contain forward looking information. The
economic, operating results, trends and expectations noted below may be
different from actual events; those differences might be significant and might
affect, among other measures and trends, revenues, expenses, assets,
liabilities, shareholders' equity and cash flows.
Although expectations for statewide economic growth in 2006 and beyond remain
favorable, they are below the high rates of growth experienced in 2004 and 2005.
However, the Company believes that the current economic outlook will continue to
support its earnings growth expectations for 2006.
The first half's financial results were accompanied by favorable progress on
major initiatives in both our ocean transportation and real estate segments.
Based on the encouraging results of the strong start in 2006, the Company
remains confident that progress on major real estate development projects and
Matson's trans-Pacific expansion will position the Company for even stronger
performance in the years to come.
Starting in the third quarter, revenue from the China Service should
increasingly offset the fixed operating costs of the Guam and China services and
the loss of charter revenue from the APL Alliance. As a result, the Company
anticipates comparisons in the second half of 2006 will be much more favorable,
with second half earnings to approach or perhaps match second half 2005. China
volumes in the second quarter continued to ramp up nicely, offsetting lower than
planned rates. In the Hawaii trade, cost increases will continue to be an
important factor, with negotiated wage increases effective July 1, 2006 and an
expectation of continued, but moderate, fuel cost increases. Matson Integrated
Logistics produced an outstanding quarter, with positive year-over-year
comparisons forecast for the remainder of 2006. The logistics segment is poised
for continued growth, though margins may moderate somewhat from very high second
quarter levels.
Real estate industry results for the second quarter reaffirm the expectation of
full year growth that meets or exceeds the company's long-term annual growth
target of 13-15%. For real estate sales, the majority of the Company's
remaining property sales for 2006 are likely to take place in the fourth
quarter. While the Hawaii residential market appears to be in transition, with
lower sales volumes, and prices that appear to be leveling off, the Company's
development projects and joint venture investments continue to perform well.
At the Company's Kukui'ula project, which is being developed in a partnership
with an affiliate of DMB Associates, Inc., 123 lots in the first two phases are
being offered to members of the Founders program. As of late July 2006,
approximately 70 non-binding letters of intent to purchase have been signed,
and an additional 30 letters of intent are pending. Remaining lots are now
being offered to members of Kukui'ula's Discoverers program, which consists of
approximately 120 potential buyers. As reported in the Company's April 2006
quarterly earnings call, the Founders program had approximately 260
subscriptions. As of late July 2006, besides the 100 executed or pending
letters of intent described above, approximately 40 Founders have cancelled
their subscriptions, and the remaining 120 Founders will be making their
decision on whether to purchase a lot in 2007. Sales contracts will be issued
to buyers in the third quarter, with closings scheduled for the fourth quarter.
The Company projects that only a negligible amount of the Company's projected
2006 operating profit, and between 10% to 15% of its 2007 projected operating
profit, both as a percentage of consolidated operating profit, is expected to be
generated from residential sales that are not currently under binding contracts.
The real estate industry segment outlook is reinforced by continuing robust
commercial real estate conditions that are reflected in particularly strong
leased properties portfolio occupancy rates which reached a Company record 98%
occupancy across its Hawaii and Mainland U.S. properties.
Should current market prices for sugar, power and molasses hold throughout the
year, the food products segment should be modestly profitable for the balance of
the year. Despite the absence of the one-time payment of $5.5 million received
in 2005, the Company anticipates profitability at or near 2005 levels.
FINANCIAL CONDITION, LIQUIDITY, FINANCING ARRANGEMENTS AND CASH FLOWS
Liquid Resources: The Company's principal liquid resources, comprising cash and
cash equivalents, receivables, sugar and coffee inventories and unused borrowing
capacity on revolving credit and private placement shelf facilities, less
accrued deposits to the CCF, totaled approximately $665 million at June 30,
2006, an increase of $45 million from December 31, 2005. The increase was due
primarily to $44 million in higher available balances on revolving credit and
private placement shelf facilities, $15 million in higher sugar and coffee
inventories and $10 million in higher receivables balances, partially offset by
$23 million of lower cash balances.
Balance Sheet: Working capital was $29 million at June 30, 2006, a decrease of
$20 million from the balance carried at the end of 2005. The decrease in working
capital was due primarily to lower cash balances, lower balances for real estate
held for sale, and higher balances on revolving credit facilities. These factors
were partially offset by higher balances for accounts receivable and higher
inventory balances.
Cash and cash equivalents totaled $34 million at the end of the second quarter
compared with $57 million at the beginning of the year. The lower balance is due
principally to share repurchases, net deposits into the CCF, and capital
expenditures.
Long-term Debt, including current portion, totaled $407 million at June 30, 2006
compared with a balance of $327 million at December 31, 2005. This $80 million
increase was due mainly to capital expenditure financing and share repurchases.
The Company's net deferred tax obligation was $421 million at June 30, 2006
compared with $399 million at December 31, 2005. This $22 million increase was
due principally to CCF deposits, and to a lesser extent, tax-deferred real
estate sales.
Cash Flows and Capital Expenditures: Cash Flows from Operating Activities
totaled $40 million for the first half of 2006, compared with $129 million for
the first half of 2005. This decrease was principally the result of gains on the
sale of properties that are classified as either investing cash flows or
non-cash transactions, changes in current and deferred income tax and accounts
receivable balances, and lower Matson earnings.
Capital expenditures for the first half of 2006 totaled $87 million compared
with $174 million for the first half of 2005. The expenditures for the first
half of 2006 relate primarily to equipment purchases for the ocean
transportation segment and expenditures related to property development
activities. The $174 million for the first half of 2005 relates primarily to the
purchase of the MV Manulani for $144 million. The amounts reported in Capital
Expenditures on the Statement of Cash Flows for the first half of 2006 exclude
$33 million of tax-deferred purchases since the Company did not actually take
control of the cash during the exchange period.
On July 12, 2006, the Company took delivery of the MV Maunalei. The purchase
price for the MV Maunalei was $147 million. The purchase of the MV Maunalei was
funded with the CCF, cash from operations, and borrowings under the DnB NOR
revolving credit facility. The amount drawn under the DnB NOR revolving credit
facility upon delivery of the ship totaled approximately $70 million and, in
addition to providing partial financing for the ship, was used for other general
corporate purposes.
On April 27, 2006, the Company announced a joint venture partnership with Gentry
Investment Properties to develop Phase I of the Waiawa master-planned community
in Central Oahu. The joint venture will act as the master developer for Phase I,
selling development parcels to homebuilders. Phase I is planned and entitled for
approximately 5,000 residential units, to be developed over a 10-year time
frame. The Company's total equity contribution is expected to be approximately
$50 million. Equity contributions will be made over the course of development,
commencing upon the satisfaction of certain conditions that are expected to be
met in the third quarter of 2006.
Tax-Deferred Real Estate Exchanges: Sales - During the first half of 2006, sales
and condemnations proceeds which qualified for potential tax-deferral treatment
under the Internal Revenue Code Sections 1031 and 1033 totaled approximately $58
million. The proceeds included the sales of two retail centers in Phoenix,
Arizona, a Maui office building, three commercial parcels on Maui, and a vacant
parcel on Kauai.
Purchases - During the first half of 2006, the Company acquired, using the
proceeds from tax-deferred sales (including reverse 1031 transactions), property
totaling approximately $66 million. The properties acquired with tax-deferred
proceeds principally included a two-building office property in Salt Lake City,
Utah, a two-building office complex in Plano, Texas, and a two-story office
building in Sacramento, California.
The proceeds from 1031 tax-deferred sales are held in escrow pending future use
to purchase new real estate assets. The proceeds from 1033 condemnations are
held by the Company until the funds are redeployed.
The funds related to 1031 transactions are not included in the Statement of Cash
Flows but are included as non-cash information below the Statement. For "reverse
1031" transactions, the Company purchases a property in anticipation of
receiving funds in a future property sale. Funds used for reverse 1031 purchases
are included as capital expenditures on the Statement of Cash Flows and the
related sales of property, for which the proceeds are linked, are included as
real estate sales in the Statement.
Commitments, Contingencies and Environmental Matters: A description of
commitments and contingencies at June 30, 2006 is described in Note 3 to the
financial statements of Item 1.
OTHER MATTERS
Investments: The Company's joint ventures are described in Item 8 of the
Company's most recently filed Form 10-K.
Dividends: On April 27, 2006, A&B announced an increase in the second quarter
2006 dividend to 25 cents per share. The previous dividend was 22.5 cents per
share. On June 22, 2006, the Company's Board of Directors announced a
third-quarter 2006 dividend of 25 cents per share, payable on September 7, 2006
to shareholders of record as of the close of business on August 3, 2006.
Significant Accounting Policies: The Company's significant accounting policies
are described in Note 1 of the consolidated financial statements included in
Item 8 of the Company's most recently filed Form 10-K.
Critical Accounting Estimates: The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America, upon which the Management's Discussion and Analysis is based, requires
that Management exercise judgment when making estimates and assumptions about
future events that affect the amounts reported in the financial statements and
accompanying notes. Future events and their effects cannot be determined with
absolute certainty and actual results will, inevitably, differ from those
estimates. These differences could be material. The most significant accounting
estimates inherent in the preparation of A&B's financial statements were
described in Item 7 of the Company's 2005 Form 10-K.
New Accounting Standards: On July 13, 2006, the Financial Accounting Standards
Board (FASB) issued FASB Interpretation No. 48, "Accounting for Uncertainty in
Income Taxes--an interpretation of FASB Statement No. 109" (FIN 48). This
Interpretation prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. This Interpretation also provides guidance
on derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. The new rules will be effective for the
Company in 2007. At this time, the Company has not completed its review and
assessment of the impact of adoption of FIN 48.
Information about the impacts of other newly issued accounting standards are
discussed in the Company's most recently filed Form 10-K.
Economic Conditions: Two primary sources of periodic economic forecasts for the
state are the University of Hawaii Economic Research Organization (UHERO) and
the state's Department of Business, Economic Development & Tourism (DBEDT).
Forecasts from these independent organizations suggest that the economic outlook
is moderating but sustainable for the next few years. For more information
please go to the websites of these organizations at www.uhero.hawaii.edu and
--------------------
www.hawaii.gov/dbedt/info/economic, respectively.
----------------------------------
Officer and Management Changes: The following management changes occurred
between April 1, 2006 and July 28, 2006.
Christopher J. Benjamin was named treasurer of A&B effective May 1,
2006. Mr. Benjamin was also named treasurer of A&B Properties, Inc, and
continues in the positions of senior vice president and chief financial
officer of A&B.
W. Allen Doane was named chairman of the boards of A&B and Matson
effective April 28, 2006. Mr. Doane is also president and chief
executive officer of A&B.
Paul K. Ito was promoted to controller of A&B effective May 1, 2006.
Charles M. Stockholm retired as chairman of the boards of A&B and
Matson effective April 27, 2006.
Thomas A. Wellman resigned as vice president, treasurer and controller
of A&B effective May 1, 2006. He also resigned from other subsidiaries
in which he held officer positions.
Ruthann S. Yamanaka resigned as vice president human resources of A&B,
effective May 13, 2006.
John B. Kelley, vice president investor relations of A&B, passed away
on May 24, 2006.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
-------------------------------------------------------------------
Information concerning market risk is incorporated herein by reference to Item
7A of the Company's Form 10-K for the fiscal year ended December 31, 2005. There
has been no material change in the quantitative and qualitative disclosure about
market risk since December 31, 2005.
ITEM 4. CONTROLS AND PROCEDURES
--------------------------------
(a) Disclosure Controls and Procedures. The Company's management, with
the participation of the Company's Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of the Company's
disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,
as amended (the "Exchange Act")) as of the end of the period covered
by this report. Based on such evaluation, the Company's Chief
Executive Officer and Chief Financial Officer have concluded that,
as of the end of such period, the Company's disclosure controls and
procedures are effective in recording, processing, summarizing and
reporting, on a timely basis, information required to be disclosed by
the Company in the reports that it files or submits under the
Exchange Act.
(b) Internal Control Over Financial Reporting. There have not been any
changes in the Company's internal control over financial reporting
(as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the fiscal quarter to which this report relates
that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
--------------------------------------------------------------------
Issuer Purchases of Equity Securities
-------------------------------------------------------------------------------------------------------------------------------
Total Number of Maximum Number
Shares Purchased as of Shares that
Part of Publicly May Yet Be Purchased
Total Number of Average Price Announced Plans Under the Plans
Period Shares Purchased Paid per Share or Programs or Programs
-------------------------------------------------------------------------------------------------------------------------------
Apr 1 - 30, 2006 -- -- -- --
-------------------------------------------------------------------------------------------------------------------------------
May 1 - 31, 2006 -- -- -- --
-------------------------------------------------------------------------------------------------------------------------------
Jun 1 - 30, 2006 1,184,000 $46.25 (1) 1,184,000 816,000
-------------------------------------------------------------------------------------------------------------------------------
(1) On December 9, 2004, A&B's Board of Directors authorized A&B to
repurchase up to two million shares of its common stock through
December 31, 2006. In June 2006, A&B purchased 200,000 shares on the
open market at an average price of $42.35. Additionally, the Company
also entered into an accelerated share repurchase agreement ("ASR")
with Goldman, Sachs & Co. ("Goldman") on June 27, 2006 to repurchase
shares of A&B's common stock for an aggregate purchase price of
approximately $63 million. The maximum average price paid per share
that will be paid under the ASR is $46.83, which is based on 984,000
and 361,342 shares delivered on June 30, 2006 and July 12, 2006,
respectively. The average price per share paid to date under the ASR
may not be representative of the final average repurchase price per
share because A&B may receive additional shares for no additional
consideration. Under the terms of the ASR, the Company may receive up
to an additional 184,099 shares upon termination of the agreement in a
third installment based on the volume weighted average price of A&B's
common stock from July 8, 2006 through to the end of the termination
period, which may be determined by Goldman in its discretion from
September 8, 2006 through November 10, 2006. A&B has no further
obligation to provide additional cash or to issue additional shares
under the agreement, and consequently, any additional shares received
would reduce the final average price paid per share. The final average
repurchase price per share under the ASR is expected to range from
$41.19 to $46.83. Through July 28, 2006, our total share repurchases
totaled 1,545,342 shares for $71.5 million at an average price of
$46.25 per share.
ITEM 6. EXHIBITS
-----------------
10.a.(lv) Amendment No. 3 dated July 7, 2006, to Shipbuilding Contract
(Hull BN460) between Aker Philadelphia Shipyard, Inc. and Matson
Navigation Company, Inc., dated February 14, 2005.
10.b.1.(xiv) Amendment No. 4 to the Alexander & Baldwin, Inc. 1998
Stock Option/Stock Incentive Plan, effective June 22, 2006.
10.b.1.(xv) Form of Restricted Stock Issuance Agreement pursuant to the
Alexander & Baldwin, Inc. 1998 Stock Option/Stock Incentive Plan.
10.b.1.(xvi) Form of Non-Qualified Stock Option Agreement pursuant to
the Alexander & Baldwin, Inc. 1998 Stock Option/Stock Incentive Plan.
10.b.1.(xxiv) A&B Deferred Compensation Plan for Outside Directors,
amended and restated effective January 1, 2005.
10.b.1.(xxv) A&B Excess Benefit Plan, amended and restated effective
January 1, 2005.
10.b.1.(xxvi) A&B Executive Survivor/Retirement Benefit Plan, amended
and restated effective January 1, 2005.
10.b.1.(xxvii) A&B 1985 Supplemental Executive Retirement Plan, amended
and restated effective January 1, 2005.
10.b.1.(xlii) Alexander & Baldwin, Inc. Deferred Compensation Plan,
amended and restated effective January 1, 2005.
31.1 Certification of Chief Executive Officer, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALEXANDER & BALDWIN, INC.
--------------------------------------
(Registrant)
Date: July 28, 2006 /s/ Christopher J. Benjamin
--------------------------------------
Christopher J. Benjamin
Senior Vice President,
Chief Financial Officer and
Treasurer
Date: July 28, 2006 /s/ Paul K. Ito
--------------------------------------
Paul K. Ito
Controller
EXHIBIT INDEX
10.a.(lv) Amendment No. 3 dated July 7, 2006, to Shipbuilding Contract
(Hull BN460) between Aker Philadelphia Shipyard, Inc. and Matson Navigation
Company, Inc., dated February 14, 2005.
10.b.1.(xiv) Amendment No. 4 to the Alexander & Baldwin, Inc. 1998
Stock Option/Stock Incentive Plan, effective June 22, 2006.
10.b.1.(xv) Form of Restricted Stock Issuance Agreement pursuant to the
Alexander & Baldwin, Inc. 1998 Stock Option/Stock Incentive Plan.
10.b.1.(xvi) Form of Non-Qualified Stock Option Agreement pursuant to
the Alexander & Baldwin, Inc. 1998 Stock Option/Stock Incentive Plan.
10.b.1.(xxiv) A&B Deferred Compensation Plan for Outside Directors,
amended and restated effective January 1, 2005.
10.b.1.(xxv) A&B Excess Benefit Plan, amended and restated effective
January 1, 2005.
10.b.1.(xxvi) A&B Executive Survivor/Retirement Benefit Plan, amended
and restated effective January 1, 2005.
10.b.1.(xxvii) A&B 1985 Supplemental Executive Retirement Plan, amended
and restated effective January 1, 2005.
10.b.1.(xlii) Alexander & Baldwin, Inc. Deferred Compensation Plan,
amended and restated effective January 1, 2005.
31.1 Certification of Chief Executive Officer, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.